B

ank Indonesia (BI) will start publishing the Jakarta interbank spot dollar rate (JISDOR) on May 20, a new rupiah reference rate that the central bank expects to shield the rupiah against speculators playing in offshore rates.

'The new reference rate can be used as a reference for banks in their forex transactions,' BI Deputy Governor Perry Warjiyo said on Friday at his Jakarta office, referring to the new JISDOR rupiah reference rate.

The rate will be based on the compilation of rupiah rates against the US dollar submitted by all banks performing foreign exchange (forex) trading. BI will compile the rates by all local banks every day from 8 a.m. to 9:45 a.m., which is normally a busy period for forex transactions. The central bank will then publish the reference rate at 10 a.m.

This means that when a bank performs a forex transaction with its clients that will need a rupiah reference rate against the dollar, they will now be able to settle it using JISDOR's rate published by BI, according to Perry.

At the moment, the central bank has one rupiah reference rate against the dollar published on its website: BI's mid-rate. However, local banks rarely use it as a benchmark, questioning the credibility of the rate as it frequently differs from the actual market price.

Dollar rates set by the Association of Banks in Singapore (ABS), for example, are normally Rp 50 to 150 higher than those quoted by BI, Reuters reported.

With the establishment of JISDOR, Perry expressed his optimism that it would eventually provide more credible rupiah quotes for investors as well as banks and their clients.

BI has been struggling to fight speculators dabbling in offshore currency rates commonly known as non-deliverable forwards (NDF). At the moment, investors are forced to quote offshore NDFs especially in Singapore ' not BI's rupiah rate ' when performing dollar-based transactions, as there has yet to be any credible benchmark rate
available locally.

However, many central banks in emerging economies deem NDF their enemy, as it is prone to speculative trade that can prompt unwanted volatility. Around 60 to 80 percent of transactions related to NDF are speculative, according to a study by The Federal Reserve, the US central bank.

'We know that NDF rates set overseas were set by the standards [of banks operating there],' said Perry. 'With our new reference rate, I believe that we can eliminate asymmetric information bothering players in the local and offshore currency market.'

The rupiah, the worst-performing currency in the Asian region last year, is known for its high volatility, mainly due to the lacking dollar supply in the local currency market. In the first four months this year, BI's forex reserves have cumulatively depleted by $5.6 billion as the central bank had to actively intervene to stabilize the currency.

Meanwhile Citi Research economist Helmi Arman said that BI's move to introduce the new reference rate based on market prices in JISDOR would be a good step toward promoting better transparency in the local currency market.

'However, for it to be widely accepted as a reference rate by market participants, it must first gain credibility,' Helmi told The Jakarta Post.

'This means BI must ensure adequate liquidity in the interbank forex market.'

The new reference rate indicates that the central bank is showing an 'explicit attempt to move away from using fixing as the basis for forex transactions', according to Gundy Cahyadi, an economist with OCBC Bank in Singapore.

Nevertheless, Gundy predicted that the impact of the policy in the currency market could only be felt in the long-run.

'It may take sometime, maybe years, before this becomes more useful as the basis of forex transactions.'